The landslide electoral victory of Japan’s opposition DPJ on Sunday marked the end of 50 years of one-party hegemony by the LDP. That sounds as if it should be important, notes Tokyo-based analyst Peter Tasker in Thursday’s FT. Yet the stock market’s reaction — a feeble rally followed by a sharp fall — suggests the incoming Hatoyama administration “will have the shortest honeymoon since Britney Spears got hitched in Las Vegas”.
Rather than the “new dawn” being widely trumpeted for Japan, perhaps investors fear more of the same – or worse, and such concerns may have helped drive down the Nikkei stock average for a second day on Thursday. But it’s important to note, says Tasker, that the key Japanese indices are dominated by large-cap global companies:They are no more representative of Japan’s domestic economy than the FTSE 100 is of the UK economy. They cannot decouple from global trends in commodities prices, credit spreads and OECD leading indicators until there has been a dramatic change in sector weightings.Indeed, analysts have widely attributed the Nikkei’s slide to fresh worries about Japanese corporate earnings and US economic trends.
The yen, however, has been doing fine, thank you – a fact that put further downward pressure on export-related Japanese stocks this week. On Thursday, the currency traded near a seven-week high against both the euro (Y132) and the dollar (Y92.31), as stocks slid, Bloomberg reported.
The newswire quoted one analyst saying: “Risk aversion is prevailing amid worries over the sustainability of the global economic recovery.”
Without dwelling on how and why the yen manages to retain its status as a safe haven currency – in a battered economy with numerous structural problems – there are various yen-positive factors.
As the FT notes, the DPJ has raised hopes with its pledges to encourage consumer spending in a drive to lift Japan out of its deflationary doldrums. Party leaders also helped the yen gained traction against the dollar ahead of the election with statements that the DPJ did not favour continued unconditional acquisition of dollar-denominated debt.
Geoffrey Yu, of UBS, told the FT that if the DPJ’s rise to power also heralds a more active reserve management strategy by Japan, one of the biggest holders of dollar debt, then dollar/yen rates could come under pressure.
Tohru Sasaki of JPMorgan sees a high probability that USD/JPY rates will break below 90 and EUR/JPY below 127. In a Thursday note, he reiterated factors such as tax-law changes to encourage Japanese corporates to repatriate earnings, foreign investor flow into Japanese equities, and the build-up of yen short positions by retail investors through forex margin trading. In addition, he said, the recent fall in US long-term bond yields “may also have positive implications for yen”.
Even some “yen bears”, such as CLSA’s Asia strategist Christopher Wood, are rethinking their structurally bearish views on both the currency and government bond market, acknowledging the potential for Japan to move to a more domestic demand-driven model. As Wood put it in a recent Greed & Fear newsletter:For if the DPJ policies do actually succeed in promoting domestic demand financed by real spending cuts, though admittedly that is a massive if, it should be bullish for the yen. It would certainly mean that yen interest rates would be under upward pressure, however gradual. Meaningful spending cuts in the budget would also mean that the fiscal position would become more sustainable. For these reasons a more open mind has to be kept on the yen until it becomes clear if the politics is really changing.
Related links:
Japan votes to swim with the current of history, Jonathan Allum – The Times
Japan emerges from recession – FT
Japanese economy – Lex
Japan – two lost decades? – FT Alphaville